1. Which of the following are reasons that banks are so heavily regulated?
a. Governments are concerned about the safety of deposits.
b. The industry is a principal determinant of aggregate demand. c. Bank failures are contagious.
d. All of the above are correct.

2. Bankers' business decisions can affect the money supply because bankers
a. are respected men and women.
b. have the ability to create money.
c. use a special accounting system developed by the Federal Reserve Board.
d. All of the above are correct.

3. Bank failures in the U.S.
a. occurred frequently through the 1960s and declined since then.
b. occurred infrequently through the 1960s and have become more common since then.
c. occurred frequently through the 1930s, declined after that time, and became more common in 2008.
d. occurred infrequently through the 1930s, increased after that time, and became less common in 2008.

4. Money is an imperfect store of value when
a. the rate of inflation is high.
b. the unemployment rate is high.

5. Fiat money is
a. always backed by gold or silver. b. useful in buying Italian cars.

6. Which of the following assets is most liquid? a. short-term government bonds
b. savings accounts
c. gold prices are falling.
d. businesses are failing due to bankruptcy.
c. only backed by government decree. d. not as liquid as precious metals.
c. checking accounts d. currency and coins

7. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ____.
a. M1 c. M3
b. M2 d. L

8. One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are
a. better stores of value than those added to compute M2.
b. more liquid than those added to compute M2.
c. less liquid than those added to compute M2.
d. larger than those added to compute M2.

9. Bank regulation exists because public authorities are convinced that
a. the balance between public interest and safety does not affect profitability, and should be removed from the hands of managers.
b. the balance between bank profitability and public interest cannot be handled with legislation, but can be handled with regulation.
c. the balance between bank profitability and safety cannot be left to profit-maximizing managers.
d. the balance between bank safety and public interest can best be obtained by reliance on the market.

10. Banks try to keep their level of excess reserves low because
a. b. c. d.
the Fed charges a penalty for holdings of excess reserves.
they are concerned that the money multiplier will become too large. they wish to maximize profits.
bank regulators levy fines on the amount of excess reserves.

11. If the
a. 10. c. 4. b. 5. d. 2.
required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is

12. If the the maximum amount by which the money supply can be increased? banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is
a. $25 million
b. $20 million

13. Barter transactions involve a double coincidence of wants.

a. True b. False
c. $5 million d. $2.5 million

14. The only major disadvantage of paper money is that it is hard to divide into smaller denominations.
a. True

15. The principal objective of the Federal Reserve System is to
a. circulate coins and paper Federal Reserve Notes.
b. subsidize the income of member banks.
c. help stabilize the economy through monetary policy.
d. make profits to remit to the Treasury Department.
b. False

16. In practice, money supply and short-term interest rates are determined by the a. b.

17. If the a. b. c. d.
Treasury and Commerce departments. c. Board of Governors. Federal Open Market Committee. d. House and Senate.
Fed buys a T-bill from a commercial bank, how will it pay for the T-bill? It will give the bank new reserves.
It will write the bank a check.
It will transfer cash to the bank's vault.
It will take reserves from another bank.

18. If the Federal Open Market Committee decides to expand the money supply, then it will
a. raise the discount rate to member banks.
b. issue directions to purchase government securities, thus putting more reserves in member
banks.
c. issue directions to sell government securities, thus taking reserves from member banks.

d. order new Federal Reserve notes delivered to member banks.

19. As a knowledgeable investor in 2007, you should have realized that as interest rates fell, bond prices would
a. also fall. c. become more volatile, like stock prices.
b. rise. d. fall but not by as much as stock prices.

20. The concept of "lender of last resort" is that when
a. lending decreases, the Fed will be the last to resort to higher interest rates.
b. borrowing increases, the Fed will be the last to increase lending.
c. commercial banks are hesitant to lend, the Fed will step in and increase reserves. d. a borrower has tried everyone else, the Fed will lend directly to them.

21. If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what would happen to the money supply?
a. It would decrease. c. It would remain unchanged.
b. It would increase. d. It depends on the value of interest rates.

22. Which of the following is most sensitive to monetary policy?
a. Governmentexpenditure b. Consumption spending

23. The main purpose of expansionary monetary policy is to

a. expandTreasuryborrowing.
b. increase reserve requirements.
c. Utilityspending
d. Investment spending
c. insure deposits.
d. reduce interest rates.

24. The Fed is institutionally independent. A major advantage of this is that monetary policy
a. b. c. d.

25. Open a. b.
is subject to regular congressional scrutiny. will often offset fiscal policy.
is not controlled by politicians.
is usually coordinated with fiscal policy.
market operations generally involve the purchase and sales of governmentsecurities. c. coinsandcurrency. stocks and bonds. d. Federal Reserve notes.

26. Banks will hold additional excess reserves when
a. loans to customers look safe and interest rates are high.
b. they anticipate a bank audit.
c. loans to customers look risky and interest rates are low.
d. the economy is booming and there is a large demand for loans.

27. The United States is the only industrialized country without a central bank. a. False b. True

28. Unconventional monetary policies include massive lending to banks and open-market purchases of assets other than Treasury bills.
a. True b. False

29. Which of the following was not a typical characteristic of subprime mortgages in 2003-2006?
a. low or zero down payments
b. loans to borrowers with poor credit histories
c. Lenders may not verify the stated income of the borrowers
d. Home interest rate was a record high

30. The intended use of TARP funds was to
a. support the FDIC. c. fund "shovel-ready" projects. b. increase consumers' disposable income. d. purchase unwanted securities.

31. What amount of money was appropriated by Congress for the Troubled Asset Relief Program? a. Around $20 billion c. Around $700 billion
b. Around $252 billion d. Around $1 billion

32. Based on the documentary, "House of Cards", which of the following is true
a. The Fed cut interest rate near zero immediately after Sept 11 tragic attack
b. Even the Fed Chairman didn't understand some of the financial innovations used by Wall
Street
c. Increasing homeownership was one of the policy of the Bush administration
d. All of the above

33. According to the documentary, "House of Cards",
a. There was no regulatory loophole during 2001-2006.
b. Housing prices increased along with basic economic fundamentals such as income.
c. The effect of financial crisis felt in the US only.
d. None of the above

34. According to the documentary, "House of Cards",
a. Big commercial banks, like Bank of America, and big investment banks, like Lehman
Brothers, were the only institutions affected by the recent financial crisis.
b. The Fed and the Securities and Exchange Commission were active in regulating the
financial system.
c. Subprime mortgage was one of the root causes for the financial crisis.
d. None of the above

35. During the financial crisis of 2007-2009, the proper policy response was
a. contractionary monetary and fiscal policy.
b. contractionary monetary and expansionary fiscal policy.
c. expansionary monetary and fiscal policy.
d. expansionary monetary and contractionary fiscal policy.

36. If you divide the amount of nominal GDP by the stock of money, you have computed the a. multiplier. c. velocityofcirculation. b. price level. d. inflation rate.

37. Which of the following will increase the velocity of circulation?
a. Interest rates increase.
b. The inflation rate decreases.
c. Federal banking legislation abolishes credit cards.
d. Employers decide to pay employees once a month instead of once a week.

38. When the Fed decreases the money supply, interest rates
a. rise, causing velocity to fall.
b. fall, causing velocity to fall.
c. rise, causing velocity to rise.
d. fall, causing velocity to rise.

39. When the Fed exhausts all options and the economy still needs some kind of stimulus
a. It report to congress for fiscal policy.
b. It opts for unconventional monetary policies.
c. It lets banks to decrease a reserve requirement near zero.
d. It does nothing else.

40. When the Fed decreases the money supply, interest rates
a. rise, causing velocity to fall. c. rise, causing velocity to rise.
b. fall, causing velocity to fall. d. fall, causing velocity to rise.